Treasurer Josh Frydenberg has officially rejected Hong Kong-based CK Group’s $13 billion bid for Australia’s east coast gas pipeline owner APA Group, two weeks after his preliminary ruling declared the deal was contrary to the national interest.
Though national security grounds were a consideration for the government behind the scenes, Mr Frydenberg said he knocked back the deal because it would result in a single foreign company group having sole ownership and control over Australia’s most significant gas transmission business.
“I thank CK Group for the way they have engaged constructively, both before and since my preliminary decision,” Mr Frydenberg said in a statement on Tuesday night.
“My decision is not an adverse reflection on CK Group or the individual companies. CK Group companies are already a substantial investor in Australia’s gas and electricity sectors and a significant provider of infrastructure services that millions of Australians rely upon.”
He left a slight opening for an improbable restructured bid by CK Group, by declaring his decision was based on the “current proposed acquisition” and that he considers “each foreign investment proposal on its merits.”
It remains to be seen whether industry superannuation fund-backed IFM Investors, which has made known its interest in APA, seeks to make a rapid move on the target now that CKI has been knocked back.
But sources have said that any potential offer from IFM would be lower than CKI’s $11 a share offer.
APA’s board had endorsed the all-cash bid by the CK Group consortium, which was being led by CK Infrastructure (CKI).
The Treasurer officially announced his final decision after the Hong Kong and Australian stock markets closed on Tuesday evening.
The Treasurer’s decision follows public debate and consideration within government about potential national security risks from China’s influence over Hong Kong, where CK Group is publicly listed.
ASX-listed APA Group is the largest gas transmission system owner in Australia, controlling 56 per cent of the national pipeline, including 74 per cent in NSW and Victoria. APA supplies gas for all mainland capital cities’ consumption, gas-fired electricity generation assets and liquefied natural gas exports, the government said.
National security concerns
The government’s decision follows consultation with the Foreign Investment Review Board, intelligence agencies and the government’s new Critical Infrastructure Centre, a unit of the Department of Homeland Affairs designed to provide “clear, consolidated and early” national security advice to inform the Treasurer’s national interest decision on foreign investment proposals.
APA chairman Michael Fraser told shareholders at the annual shareholder meeting recently that the pipeline owner would “revert to our original plan A” if the bid didn’t go through, and pointed to billions of dollars of growth opportunities on the horizon over the next several years. He noted the board had “never put a ‘For Sale’ sign up” on the business.
Separately, there has been market speculation CKI might restructure the bid to appease the government, although most observers believe that is unlikely.
One potential work-around would be for CKI to join with an Australian superannuation fund for its bid, potentially Unisuper, which currently holds 16 per cent of APA, or IFM Investors, which is known to be interested.
But CKI has a reputation for not partnering on investments.
The second option could be for CKI to commit to selling some of APA’s assets in a certain period of time – but again CKI would be unlikely to want to tie itself into such an obligation.
The Australian Competition and Consumer Commission boss Rod Sims, who has regularly criticised the market power exercised by APA, declared in September he was powerless to prevent the takeover because competition law prevents the ACCC stepping in if the transaction doesn’t change the competition landscape.
Unlike the ACCC the Treasurer considered the concentration of foreign ownership.
Mr Frydenebrg said the government remained committed to welcoming foreign investment not considered contrary to the national interest.
The government has rejected some past proposed acquisitions from mainland China on national security concerns, though CK Group is a publicly listed entity in Hong Kong with a 20-year track record in Australia.
In 2016 the Coalition government blocked on national security grounds CKI and China’s State Grid Corporation from buying half of NSW power distributor Ausgrid, reportedly because the electricity infrastructure is critical to support the joint US-Australia military surveillance facilities at Pine Gap, near Alice Springs in the Northern Territory.
The government last year approved CK’s $7.4 billion takeover of DUET Group, owner of power lines, gas pipelines and power plants.